In Royal Devon and Exeter NHS Foundation Trust (the Trust) v ATOS IT Services (ATOS), the Court of Appeal considered the meaning of an ambiguously worded limitation of liability clause. In doing so, it held that the clause in question imposed two separate caps on liability rather than a single cap, overturning the High Court judgment on this point.
The High Court had also examined a claim for wasted expenditure and ruled that it should be distinguished from a claim for lost profits, lost revenues and lost savings. Neither party appealed this part of the judgment (see our previous update on the High Court judgment).
Liability cap: High Court judgment
The Trust and ATOS entered into a contract for the delivery to the Trust of an Electronic Medical Records system enabling electronic document management and scanning. Unhappy with the performance of the system, the Trust terminated the contract alleging a material breach by ATOS on the basis that it had failed to remedy various defects in the system.
The Trust argued that, although the contract contained a clause capping the liability of the parties, such provision was unenforceable for ambiguity or uncertainty. ATOS's case was that any damages claimed were subject to the liability cap in the contract. Both parties had already accepted prior to the hearing that "claim" should be taken as a reference to a "default" (as defined in the contract). The liability cap included the following wording:
"9.2 The aggregate liability of the Contractor in accordance with sub-clause 8.1.2 paragraph (a) shall not exceed:
9.2.1 for any claim arising in the first 12 months of the term of the Contract, the Total Contract Price as set out in section 1.1; or
9.2.2 for claims arising after the first 12 months of the Contract, the total Contract Charges paid in the 12 months prior to the date of that claim."
Although the High Court agreed that the limitation of liability clause was not clearly drafted, it stated that it could be read with sufficient clarity and was, therefore, valid and enforceable. It reasoned that the limitation of liability clause imposed a single cap on liability, rather than two separate caps, with the level of the cap determined by whether the first default falls within the time specified in clause 9.2.1 or 9.2.2. So for example if the first default fell within the first 12 months of the contract term, and therefore clause 9.2.1 applied, ATOS's aggregate liability for all contract claims thereafter would not exceed the "Total Contract Price".
The Trust appealed against the decision that the limitation of liability clause imposed a single cap on liability and submitted that it imposed two caps; the first in respect of defaults occurring in the first 12 months of the contract term and the second in respect of all subsequent defaults.
Court of Appeal decision
The Court of Appeal allowed the appeal and held that the limitation of liability clause should be construed as imposing two caps, rather than a single cap, for the following reasons:
- The phrase "aggregate liability" in the introductory words of clause 9.2. was not necessarily a pointer towards a single cap. The phrase could equally well be interpreted to mean that the limit of liability was the aggregate of the sums set out in clauses 9.2.1 and 9.2.2.
- The Court of Appeal disagreed with the High Court in that the word "or" (read together with the phrase "aggregate liability"), found between clauses 9.2.1 and 9.2.2, pointed to alternative scenarios which cannot both apply and therefore indicated that the parties intended to agree that one cap would apply. To the Court of Appeal's view, the word "or" was conjunctive in this case and pointed to discrete periods of time (rather than to mutually exclusive approaches to calculating the cap) which did not overlap.
- The language used in clause 9.2 pointed emphatically towards the existence of two separate caps. Therefore, ATOS's liability for any default or defaults occurring in the first 12 months of the contract term would be capped at the amount of the "Total Contract Price" (as set out in clause 9.2.1). For any default or defaults occurring subsequently, ATOS's liability would be capped at a lower amount, namely the total "Contract Charges" paid in the 12 months prior to the date of that default or those defaults. If defaults occurred in both the first 12 months of the contract term and subsequently, ATOS's liability for defaults occurring in the first 12 months would be limited to the amount of the "Total Contract Price" while its liability for defaults occurring subsequently would be limited to the total "Contract Charges" paid in the previous 12 months.
- The Court of Appeal's interpretation was consistent with commercial common sense; there was nothing surprising in the parties agreeing a high value cap for defaults occurring in the first 12 months as ATOS was doing high value work in the first 12 months of the contract term. ATOS was doing lower value work after the first 12 months of the contract term, so ATOS's liability should be limited to a lower amount (as set out in clause 9.2.2).
- The High Court's analysis, which considered that the date of the first default was the critical factor for determining the level of the cap, could not be supported by the language used in clause 9.2 as there was nothing in that clause to suggest that the date of the first default was a critical factor in choosing between the two caps.
The Court of Appeal also dismissed ATOS's argument on a cross-appeal that the 12 month period referred to in clause 9.2 ended not on the date of the default but on the date when the Trust communicated its claim in respect of that default to the Trust. The words "that claim" at the end of clause 9.2.2 were not ambiguous but referred back to the words "claims arising" at the start of clause 9.2.2. The phrase "any claim arising" at the start of clause 9.2.1 and the phrase "any claims arising" at the start of clause 9.2.2 are references to defaults occurring, not to claims in respect of the defaults being notified.
The case highlights that the courts will be reluctant to treat a limitation of liability clause as being void for uncertainty. The approach of the Court of Appeal sought to give effect to all contractual terms agreed by the parties and to adopt a commercially sensible meaning where possible.
In the view of the author, the approach adopted by the Court of Appeal reflects a more natural reading of the limitation of liability clause than that previously taken by the High Court. However, this case is a useful reminder of the need to assess, at the time of drafting, whether a contract clause is clear enough to operate without any disputes arising.